CIMB Telecommunications Sector Note - Telkom eyeing Indosat's towers?

Maintain Underweight on the sector. Bisnis Indonesia reported that Telkom Indonesia is undertaking due diligence to possibly acquire Indosat's 12,000 telecom towers, according to unnamed sources. We view this news positively for Indosat as a sale would help to de-gear its balance sheet (Indosat has a net debt/annualised 9M09 EBITDA ratio of 2.6x). However, we are slightly negative on Telkom because of a likely overlap in Indosat and Telkomsel's towers, especially in urban areas and Java. We maintain our earnings forecasts, Rp4,000 DCF-based target price and UNDERPERFORM rating on Indosat pending its FY09 results, although we expect to raise our forecasts on the back of potential FY09 revenue and EBITDA upside surprises. We remain NEUTRAL on Telkom Indonesia with an unchanged DCF-based target price of Rp12,000.